Asian stocks down but maybe not out

SarahTurner

SYDNEY (MarketWatch) — Asian stocks are trading close to their lows for the year after taking a battering in May, and analysts, while still nervous, are also starting to sense opportunity.

Despite the recent losses, many of the region’s major benchmarks are still positive for the year to date, though some just barely.

South Korea’s Kospi (SEU) is showing a gain of 1.3% so far thjs year, while Japan’s Nikkei Stock Average (100000018) is up 1.4%, Hong Kong’s Hang Seng Index (HSI) has gained 2.3%, and the Shanghai Composite (000001) is 5.1% higher.

Australia’s S&P/ASX 200 index (XJO), on the other hand, is down 0.3%

Asian equity markets are each unique, but regional differences were flattened in May by a macroeconomic sledgehammer built from fear of a Greek exit from the euro zone and a collapse of the Spanish banking system.

And Europe’s pain is radiating out to other economies, as indicated lately in weak U.S. jobs data and Chinese manufacturing numbers.

“Markets have been in turmoil for weeks, and now economic data has buckled as well. This summer may prove bumpy indeed,” said Frederic Neumann, co-head of Asian economics research at banking giant HSBC Holdings. “No wonder, then, that investors are increasingly asking about the state of Asia’s defenses.”

With the Greek election looming, Citigroup emerging markets strategists said that “the outcome of next Sunday’s elections may appear to be binary for equities, including emerging markets.”

While the election of a pro-bailout government in Athens would lead to a strong, if short-lived, rally in risk assets worldwide, “other outcomes, such as victory for the anti-austerity, more extreme parties, or no decisive result at all, are likely to be followed by renewed selling in global markets,” the Citi strategists said.

Asia is vulnerable to a euro-zone break-up in two main ways: trade and finance.

While Asia is less dependent on European exports than it was in 2008 — and most economies in the region are now running current-account surpluses — Neumann at HSBC said that the turmoil seen in the 2008/2009 crisis, when exports collapsed and finance dried up, is still a fresh memory for investors.

And although Asia may now sell less to Europe, the area is still a key driver of profits for Asian companies, Neumann said, and the availability of credit is still linked to the health of the global financial system.

Additionally, “Asia’s policy response to another global slump may be less forthright than before. Structurally, it’s simply becoming harder and harder to apply a powerful stimulus without negative side effects,” he said.

Migration away from stocks

The shadow of Europe’s crisis has driven many investors out of stocks worldwide, and Asia has not been immune.

Bank of America Merrill Lynch’s latest fund-manager survey showed a sharp general decrease in global equity holdings, as investors moved into cash or other perceived safe-haven assets.

Within that broad move out of stocks, overweight positions in emerging markets — which includes most Asian bourses — halved to 17% in June, the lowest level since last October and well below the long-term average of 26%, the survey showed.

However, the survey also indicated that investors aren’t giving up completely on Asia, notably China.

Investors upped their overweight positions on Chinese stocks to the second-highest level since the survey began in 2005, with expectations of a Chinese economic hard landing relatively subdued.

One investment officer said he’s looking to the longer-term prospects for China.

“While the region is unlikely to be spared from any marked deterioration in the euro zone, we expect it to continue to outperform the developed world for a long time,” Millard said.

With some Asian economies “having tightened policy significantly in 2010 and 2011, we expect policy to be loosened further over the next few months, and significantly if that proves necessary,” he said.

China has already started to cut interest rates, recently moving to drop rates for the first time since 2008.

In addition to hope that China will move to further stimulate its economy, expectations have grown recently for global central banks to step in to try to prevent, or at least limit, fallout from Europe’s debt troubles to the rest of the globe. (Read more on reported coordinated central-bank plan.)

Against this backdrop, Citigroup’s emerging market strategy strategists said they retain their preference for Asian stocks.

At 1.5 times price to book value, the region’s stocks are back where they were in October 2011, and “historically, when the region has traded at 1.5 times price to book value, the return pay-off has proven to be quite rewarding,” they said.

“Asian shares have priced in lots of bad news. The key now is not to get over-bearish but start looking for opportunities to add to positions. The [Northern Hemisphere] summer will provide plenty of opportunities,” they said.

Nomura strategists said that, by country, they have been encouraged by a recent pick-up in earnings for South Korean companies, “given Korea’s leverage to global growth” and its intensively cyclical nature.

They also said that, by sector, Asia-Pacific consumer stocks produced the strongest surprises in the last earnings season, while financials also beat expectations with earnings modestly above forecast.

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